These may not be the worst of times for real estate professionals, but they certainly are not the best either. To add insult to injury, it is now tax time.
However, there’s one thing you can do to help keep your head above water: Take all the tax deductions to which you are entitled.
Tax deductions really add up
Many people, even sophisticated real estate professionals, don’t fully appreciate just how much money they can save with tax deductions. To understand the full value of your deductions, you must add up your total savings in federal and state taxes, and self-employment taxes.
For example, if you’re single and your taxable business income is $100,000, every dollar you deduct from your taxable income will save you close to 50 cents in taxes. This includes 28 percent in federal income taxes, 15.3 percent in self-employment taxes, and an average of 6 percent in state income taxes.
Additional business deductions are worth less if your income exceeds the $100,600 Social Security tax ceiling, because you don’t have to pay the 12.4 percent Social Security tax.
For example, if you’re in the 33 percent income tax bracket, an additional deduction will be worth 33 percent (in federal taxes), plus 6 percent (in state taxes), plus 2.9 percent (in Medicare taxes). This adds up to 41.9 percent. Still not bad.
What can you deduct?
There are dozens of possible tax deductions for real estate professionals. Any expense for your real estate business is deductible if it is:
- ordinary and necessary;
- directly related to your business; and
- reasonable in amount (see: Internal Revenue Code Section 162).
An expense doesn’t have to be indispensable to be necessary; it need only help your business in some way — even if it’s a minor way. A one-time expenditure can be ordinary and necessary.
However, you cannot deduct personal expenses. For example, the cost of a personal computer is a deductible operating expense only if you use the computer for business purposes; it is not deductible if you use it to pay personal bills or play computer games.
If you buy something for both personal and business use, you can deduct only the business portion of the expense. For example, if you buy a cellular phone and use it half of the time for business calls and half of the time for personal calls, you can deduct only half of the cost of the phone as a business expense.
Subject to some important exceptions, there is no limit on how much you can deduct, as long as the amount is reasonable and you don’t deduct more than you spend. As a rule of thumb, an expense is reasonable unless there are more economical and practical ways to achieve the same result. If the IRS finds that your deductions were unreasonably large, it will disallow them or at least disallow the portion it finds unreasonable.
Checklist of deductions
Here’s a checklist of common expenses for real estate agents and brokers that you can use to make sure you don’t miss any deductions this year:
- advertising expenses, including websites, mailing lists, newspaper advertising, fliers, online advertising, postcards, promotional materials, logo clothing, and anything else you pay for to market your real estate business;
- bookkeeping, accounting and legal fees;
- business gifts (up to $25);
- business meals and entertainment (only 50 percent deductible);
- cab fares for business travel;
- car and truck expenses, including business mileage, depreciation, insurance, interest on car loans, lease payments, license plate fees, parking expenses, and tolls;
- cell phones;
- computer software;
- desk fees;
- education to maintain or improve required skills (but not courses you take to pass the real estate licensing exam);
- home office expenses (if you qualify);
- insurance, including health insurance, errors and omissions insurance, business liability insurance, and business equipment insurance;
- interest, such as interest for business loans, interest paid on business credit cards;
- Internet access fees;
- map books;
- office equipment (cost may be deducted in one year using bonus depreciation or IRC Section 179);
- office expenses, including rent, cleaning and maintenance, and utilities;
- office supplies;
- professional dues and fees — for example, multiple listing service dues and dues paid to the local Chamber of Commerce, Realtor associations, and real estate license renewal fees;
- referral fees and commission rebates;
- retirement plan contributions;
- subscriptions to professional journals;
- real estate franchise fees;
- taxes, including payroll taxes for employees, state and local business taxes;
- telephone service fees;
- travel to business conventions, including transportation, lodging and food;
- wages and benefits paid to employees.
Stephen Fishman is a tax expert, attorney and author who has published 18 books, including "Working for Yourself: Law & Taxes for Contractors, Freelancers and Consultants," "Deduct It," "Working as an Independent Contractor," and "Working with Independent Contractors." He welcomes your questions for this weekly column.
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